charindra chandrasena  00:05
Hi Daranat. Hi Jari. Today we don't have our partner in crime Riyadh Rifai. Riyadh Rifai, but we have Ravi Ratna Sabhavati. How are you, Ravi?

Speaker 1  00:17
Good, good, good.

charindra chandrasena  00:18
You're you're no stranger to Advocata, and I think it's the first time on this podcast, but I think our followers would have seen you in other videos, and also his writings. His writings is

Dhananath Fernando  00:30
quite rather than the video form. I think he's comfortable on more on the on on writing. So if you search Ravi's name on on Google, there's a lot of articles about now he has moved to central banking and all that. It was more on the price controls and overall economy. So yeah, good to have you, Ravi. In the absence

Speaker 1  00:52
of yeah, thank you, thank you.

charindra chandrasena  00:54
So after that good news, we have to move to the bad news on the geopolitical front that now today the last time I checked oil prices had gone up almost 6% and that's on the back of the the escalating tensions re-escalating tensions between Iran and the U.S. The peace talks seem to be not going anywhere, and now Iran has actually attacked the UAE. So, as at the time of recording, we don't really know where this is going, and therefore it's it's almost pointless talking about it today. Therefore, we are going to focus on something that that we can talk about in more detail. That is that a gazette was issued, as you are well aware, with new VAT provisions. So we'll we'll talk about it one by one. But one thing I want to talk about is that it's now going to affect from the first of July digital services. Then I'll just start with you so that you can provide later context. Right now, as soon as we hear digital services, we think anything that we do online. How is this going to affect the regular online user? Are there apps going to get more expensive? Are their subscriptions going to get more expensive? What about people who use ride-hailing? And I think we we can mention the two two players here because it's public knowledge. Uber and PickMe, are they going to? Are the rides going to get more expensive?

Dhananath Fernando  02:41
Yeah.

charindra chandrasena  02:42
What what are what are your what are what is your answer? Yes,

Dhananath Fernando  02:44
the simple answer is on the digital services. That means if you are using Netflix, Google Ads, Canva, all sorts of digital services. Earlier there was no VAT, so now if you are billing through Sri Lanka for Sri Lankan subscribers, there has to be a VAT incorporated. Basically, that company has to pay that VAT. What we need to understand is when you are what they have requested is all those companies to register for VAT. When you are registering for VAT, that means you are becoming an agent of the Inland Revenue Department to collect VAT on the inland revenue on behalf of the inland revenue and get that money remedied back to the inland revenue department. For an example, if I am running, let's say some digital service, if you are a subscriber, when I am registered for VAT, that means I have to charge you VAT. So basically, you are paying to me, who is not the Indian Revenue Department. But since I am registered for that, I become kind of an agent of the Indian Revenue Department. So when you pay, let's say you pay 118 rupees for me for my subscription, it is my responsibility that I keep 100% 100 rupees for me, and make sure that 18 rupees is transferred to the Inland Revenue Department. So what they have asked is for all digital services, Google to YouTube to everything, to register for VAT. That means they have to pay 18% VAT. So what it, how it happens is when you charge 18% VAT. Of course, the companies may not absorb while they are paying it. They will pass it to the consumer. So, if you have given your credit card details for ChatGPT to Gemini to all Google services, ideally it should go up by about 18% Yes, with that 18%

charindra chandrasena  04:37
Yeah, yeah. So that that it is going to have an impact on the consumer.

Dhananath Fernando  04:41
It is going to have an impact on the consumer. There's a slight difference on the, according to my understanding, again subject for correction for the ride-hailing apps, because I think people people might think that okay, if I have a if I take a Uber or a Pick Me or a Hellergo, whether my price is going to like if the higher. 100 rupees now is it going to be 118 rupees? That is not how it is going to happen, because there are three parties involved in a Uber or a Pickney or a Heligo. Basically, there's the the passenger and there's the driver and there's the platform. So if I am taking 100 rupee Ride probably 10 rupees is going for Uber. 90 rupees. So when I pay 100 rupees, 100 rupees is collected by the driver. 990 goes to the driver. 10 rupees goes to the Uber or a picnic. So 18% on their share is the VAT. So the so basically, if you are paying 100 rupees, 10 rupees goes to Uber. From that 10 rupees, 18% is about one rupee 80 cents is what is going to be added. So basically, what you are

charindra chandrasena  05:53
saying is what the driver's commission is is not going to be affected.

Dhananath Fernando  05:57
Correct. Right. But overall, with that 18% Uber will probably increase the rate because PickMe and Helga. I'm not sure because they are falling below the likely the tax threshold, VAT threshold. They have been paying it already because of the foreign services. It wasn't covered, so now with this, everybody is covered, even including the Uber,

charindra chandrasena  06:22
right. So what's likely to happen is that Uber is going to pass it on to the drivers, the riders as well, and the consumers. Consumers, it's

Dhananath Fernando  06:33
mainly coming to the consumer. Yeah, yeah. So the riders will take their share.

charindra chandrasena  06:36
Exactly.

Dhananath Fernando  06:36
Uber will have to pay their 18% VA, and so the prices may slightly increase on the share of what Uber collects. Yeah.

charindra chandrasena  06:45
In terms of impact, and Ravi, you can come in here. In terms of impact on the industry, now we have been talking for several years about a $5 billion IT sector in terms of earnings, $5 billion dollars. Now, is that is this going to affect the growth of the sector? Is this going to spook potential foreign investments into Sri Lanka? What is what is your take on that? Yes,

Speaker 1  07:16
thank you. This is a it's an it's not an area that I'm very familiar with, but I'm just reading off some. What they've said is this act brings in foreign providers of digital services to local consumers, right? Foreign providers. So I think what Dana said. So PickMe was was not going to be affected, but Uber. Then now they've given us a list of possible of services: cloud computing, hosting, storage, and computer services. Software as a service-based providers, e-commerce services, online stores, digital marketing and advertising, search engine optimization, social media marketing, cyber security services, now IT support, managed services. Now these are all services that local companies will be will be using for their activities. So now what will happen is all their service there is going to be a vet that they will have to pay additional. So that's a cost increase for all the companies that that uses. This will be you know cloud computing, cyber security. This is all normal local companies, the banks, so many others which use these things as well as other businesses because these are efficient and cheap rather than setting up your own data. That's important point Rajiv Ravi

Dhananath Fernando  08:49
is making because for the common people it's like Netflix and Google services, but for companies point out with these cloud services, this service that service cyber security there are so many services that they use yes now yes

Speaker 1  09:02
now they are talking about cloud collaboration platforms now I'm not sure sure if this affects now there's a platform called Fiverr right that it connects local providers with with foreign freelancers so in graphic design in writing the it's called Fiverr because you charge $5. By I met an IT consultant. He said they have been trying to they've set up wallets with the banks and that there are various in certain central provinces. Others said there are one or two lakhs of of of of people who are who are providing various services? They don't earn a lot. They may be earning one lakh of rupees a month through providing these services. But what happens is these taxes may be directed directly from the from their wallets by the banks when they pay to them. So now this was actually an employment. Because our economy doesn't generate, they may be affected by by by this. So you know, so so that you know people are able to use these platforms, and so then the other thing is there is also whether it affects these social media influencers and others who who are able to who are collecting revenue as well. I don't know, but there are these are all you forms of entrepreneurship that people have come have so the platforms enable it. Others develop it, but but this is you have to think of it in terms of forms of various forms of employment generation. So, so that's what's important because, and if that affects jobs or employment, that I think is a problem for for. for for company. The other thing is we are also. But it's an

Dhananath Fernando  11:07
interesting point. You said like when you charge this VAT, you have to think it off like VAT or whatever the tax like to more look at as like an employment generation opportunities rather than on the revenue points. So you so

Speaker 1  11:19
who pays and who is affected? So, so the so if it's going to be the individuals who are doing small services, right? It's going to come out of their income. If it's businesses that are using cloud services, it's going to come. It's going to be an added cost to their To their right, which they will have to then try to recover in some way.

charindra chandrasena  11:48
Yeah, no. In terms of investment, also like in terms of FDI now, a foreign digital giant looking at Sri Lanka, and Sri Lanka not being a large market nor a very mature market. Can Sri Lanka get away with having this kind of tax, even if other countries which are more mature and larger have them? Do we are we not losing even the little competitive advantage we had?

Dhananath Fernando  12:20
So Shari, there I think there are two ways to look at it. Two, I think it's in a way quite contradictory. One is first of all, before to on the ideological side, like how to look at it. I'm not sure actually how they are going to implement it because now, if you look at these services, there are like hundreds. It's not only about like four five players. No, if it's like let's say if it's social media platforms, okay, you have like not handful, but at least you know Facebook, Twitter, YouTube, you can manage, you can have like that. There's an association, but now when you look at these digital services, it's like so many services. So I'm not sure because the guide, the guideline has been they have to register for VAT and pay it through either directly or through an agent. So for a small market, I don't know whether they will even worry or bother too much in terms of like having their agent operating their office and all that because it all adds to the cost for a small market. So I'm not sure in terms of execution and implementation-that's the execution side. But how to look at it is there are two ways to look at it. But it's connected. One,

charindra chandrasena  13:30
sorry, sorry, just to pick up on that point. When you say you don't think they would bother, are you saying that they would operate here but not bother to comply, or they would just not want to operate here?

Dhananath Fernando  13:39
They-they may not. I mean, if if it's if it's having our office and like depending on the volume of sales, whether they really want to go through that process, I'm not sure because the same thing happened. Now, when these online safety bill came, there was a conversation. Yes. Okay. Do we really have to? Because according to them, like you know, it's online safety. You have to check like all videos. You have to bring it down when there's you know this if there's content violation guidelines so whether they can really manage resources for a small 20 million marker is a question mark so whether they have a way of like through an agent to do it I'm not sure and again on the digital one I'm again not sure whether people are using VPNs and all that, whether they will register in a different way and country and all that. I'm not sure. I'm not the technical person, but probably there has to be a lot of backend work needs to be done. But on a more ideological point of view, I think there are two ways to look at it. One is there's a school of thought that okay, you impose VAT on everything, but you bring down the taxes on risks of like I mean the para tariffs, so trade taxes, all that has to be brought down. The corporate taxes, personal income taxes, you bring all that down, and you make it like VAT is the main make it because everything then under VAT where you can it's easy to administer is one way to look. The other way to look at it is the, as Ravi said, the looking at the employment and keep it the tax competitiveness, because when you are having, if you are having 18% VAT, to check whether your competing markets are also charging 18% or not, because ultimately your tax has to be competitive regionally to bring investment to operate, so those are the two ways to look at it. I think there's no right or I mean there's the the definitely the taxes has to be and also to look at why the probably Ravi can speak about it because in I don't I'm not trying to bring religion into the conversation. The if you're expanding the government size of the government, you have to continue to increase taxes and tax base. So it is very important that you basically you have to look at from the government cutting down of the government expenditure point of view beyond curtailing these taxes. There is no other way that you can constantly spend more and more and also cutting down taxes. There is no other way. So small

charindra chandrasena  16:03
government, small

Dhananath Fernando  16:04
government is needed if you really want to bring these taxes down. The more you expand, they are going to increase the tax net slowly, slowly, slowly, and it will be there will be a tipping point. So that's how I would like to see the challenge. But this again, that's why when you say taxes, if it's VAT, one school of thought is actually you impose on everything. But if you are imposing on everything, you have to cut, let go some of the taxes. You can't have like VAT on everything and also corporate taxes at 30% and personal income at 36% and you can't have para tariffs at like 90% you know, 100% on the construction items. You can't do all that. If you're having VAT across the board, definitely you have to let go SSCL and other cascading taxes and all that. If that's the case, so just

charindra chandrasena  16:54
speak a little bit about why VAT is better than SSCL and and other types of taxes. Why why is why is VAT the tax that if you have to impose a tax, make it VAT?

Dhananath Fernando  17:09
Correct. So that is basically because VAT is as the term says, it's a value added tax. So basically, VAT is you're only paying the taxes for the value values. So in terms of all taxes are bad, but out of the bad taxes, VAT is a better form of a tax because there is no cascading effect. Just to explain it very simply, imagine I am a biscuit manufacturer. So, if I am manufacturing biscuits, if if my yearly turnover is 36 million, I have to register for that under the Indian Revenue Department.

Unknown Speaker  17:45
So.


Transcribed by https://otter.ai